Wednesday, October 27, 2010

The Hole in Krugman’s Story

Ideologues bracing themselves for a bad election cycle are usually pretty good at coming up with consoling narratives. Paul Krugman has been telling the particularly influential story that Democrats shot themselves in the economic foot by not pushing for a bigger stimulus as the first major act of the Obama administration. The coming mid-terms  mark the onset of political gangrene:
“Could the administration have gotten a bigger stimulus through Congress? Even if it couldn’t, would it have been better off making the case for a bigger plan, rather than pretending that what it got was just right? We’ll never know.

“What we do know is that the inadequacy of the stimulus has been a political catastrophe. Yes, things are better than they would have been without the American Recovery and Reinvestment Act: the unemployment rate would probably be close to 12 percent right now if the administration hadn’t passed its plan. But voters respond to facts, not counterfactuals, and the perception is that the administration’s policies have failed. 

“The tragedy here is that if voters do turn on Democrats, they will in effect be voting to make things even worse.”
I’ve got nothing against consoling political narratives that point in the right direction intellectually. And I’m not the guy to tell you whether Krugman’s story makes macro-economic sense. (As it happens, I don’t think the political side of the narrative rings true even in hindsight because, as Kevin Drum has argued, given the multiplier that figured into the administration’s calculations, a 50% bigger stimulus wouldn’t have lowered unemployment enough to make a noticeable political difference.) But I understand why it consoles liberals to tell Krugman’s story to themselves. It enables them to believe that, but for a single tactical mistake, they’d still have the political juice to keep reconfiguring the political economy to their own specifications. And it inspires them to keep fighting the good fight to stop the Republican resurgence from making things worse than they have to be.

Yet there’s still a cavernous hole in Krugman’s story. Let’s stipulate that he’s right that a bigger stimulus would have gotten the economy back on track in the short run, thereby generating enough immediate growth to enable us to address our budgetary problems more effectively in the longer run through prudent monetary and fiscal policy. And while we’re at it, let’s concede that Krugman is not only right in this respect, but as indisputably right as he thinks he is. Even under those generous assumptions, his narrative about what went wrong, and his prescription about how to set things right, both turn on yet another, even more heroic, assumption, viz., that the political process is an efficient enough allocative mechanism to enable political decision-makers to fine-tune the economy over the long haul.

Believing that may not be that much of a stretch when you’re dealing with center-left majority governments in a parliamentary system that can act with enough unity of understanding and purpose to make near-optimal tradeoffs between competing liberal values and correct their mistakes over time when they get the tradeoffs wrong or their values change. But ours is a political system under which public decisions are normally negotiated among relatively autonomous political actors, each with his own power-base, political interests and conceptions of the common good and how the political economy works. Under those institutional circumstances, public decisions tend to emerge from the collision of a plurality of wills, without being willed in exactly that form by anyone in particular. So it’s a happy accident when any public decision effectuates any enlightened person’s conception of an optimal tradeoff between competing values.

Yet Krugman’s diagnosis of, and prescription for, our present predicament  presume that a succession of public decision makers can start effectuating the right tradeoffs as soon as they have the good sense to start listening to him. Why should anyone believe that, especially anyone who believes Krugman's story about what went wong?

When the stimulus bill was devised, Obama had just earned the strongest electoral mandate that a liberal president has enjoyed since 1964. He’d assembled an all-star team of economic advisers to advise him that included people like Larry Summer and Paul Volcker with proven track records as macro-economic managers. Moreover, he had a Democratic congressional majority that was nearly as large, and far more homogeneous ideologically, than the one LBJ had to work with when he passed the Civil Rights Act and Medicare.

That’s as favorable a set of conditions for a liberal macro-economic policy-making as you’re likely to see. Yet, according to Krugman, through a combination of a lack of economic foresight, a failure of political will and congressional intransigence, Democrats still managed to get fiscal policy catastrophically wrong. Why should anyone expect future liberal administrations, acting under less favorable decision-making conditions (and perhaps without the benefit of Krugman’s unerring insight) to do a better job of fine-tuning the economy?

Liberals need an answer to that question that quiets reasonable suspicion that effective liberal governance exceeds our institutional capacities. I haven’t heard one from Paul Krugman.

2 comments:

Anonymous said...

I see your point Mr. R. But Whoa Nelly!!! I'd prefer not to stipulate that Krugman's got it right that a bigger stimulus would have gotten the economy back on track. Does anyone really think this (besides him)? Is he out of his mind? Do liberals believe this? I've got both feet firmly outside the tent, so excuse me for the heavy breathing, but come on. What gives?

Uncle Albert said...

It's no accident that Clinton spent most of his first term talking about "reinventing government." He'd realized that governmental inefficiency undermined liberal policy-making. The business about the "age of big government is over" was the lesson Clinton learned from not being unable to get anything useful done with a Democratic congress.

Obama may look more effective than Clinton given his legislative scorecard. But neither he nor the congressional leadership has any idea of how or whether the 2000-page laws they have passed will work.